Noncompete clauses can be a thorny issue for retirees with future dreams

THE DREAM IS CLEAR enough: Build a company or become a top executive there, and then, when it all gets a little boring, move on to a new enterprise. But tell that to the online-data entrepreneur who is a client of Boston financial adviser Jeffrey Cutter: The entrepreneur sold his company for $55 million in his late 50s, only to get slapped with a lawsuit saying his new venture violated his noncompete agreement.

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Photograph by John Crouch/Getty Images

He won, but the ensuing legal fees alone were a six-figure ordeal. The law firm "just pummeled him with paperwork," Cutter says.

Across the country, the life cycle of a huge number of businesses is approaching the finale of sorts, with almost two-thirds of all business owners now 49 or older. According to one study, 87 percent of them have no written plan for an exit strategy, leaving them open to confusion over noncompetes if a buyer comes in and includes one. And many legal experts say noncompetes are on the rise, in part because of today's wave of new retirees. In the old days, of course, people retired for good and noncompetes were an afterthought. Now, with today's older generation staying in business, a lot of firms are attaching a host of strings to protect their assets.

Jerry Mills, chief executive of B2B CFO, a small-business services firm in Mesa, Ariz., says too many owners or executives are giving up their future for too little, without demanding stiff payments for staying out of a field. In lieu of the fat paycheck, some are trying to refine the deals, limiting their noncompetes to the product lines they're selling, or retaining the technology themselves while their old company licenses it. That way, "they're only selling the license to use," says Philip Flink, a corporate lawyer and partner at Brown Rudnick in Boston.

‘Some firms like to attach a host of strings to protect their assets.’

Legal experts say some business owners can wrangle out of noncompetes by proving they aren't, and have no intention of, poaching former clients. That almost worked for William Jones, an accountant in Tallahassee, Fla., who says he blithely signed a noncompete after selling his firm that prohibited him from practicing within 20 miles of his former business. After trying out a new career as a mediator, which didn't pan out because it wasn't lucrative enough, Jones decided to go back to accounting and bought a firm. "As the bird flies, it was right at 18 miles away. As you drive it, it's right at 20 miles," he says.

One month after opening his doors, the owner of his former practice sued. Jones, who is 61 years old, thinks he might have won, but ultimately bargained down to a third of what the buyer wanted after the litigation dragged on. "If you're going to spend more in litigation than paying someone off," he says, "pay them off and move on."

But the story doesn't end there. Ironically enough, Jones found himself on the flipside of the noncompete game when a staff accountant at his new company quit to start his own accounting business. Jones, learning from his own experience, had had all of the employees sign noncompete agreements, he recalls. It turned out that the accountant, who had signed a revision of the agreement, thought his document was now void.

"It wasn't," says Jones, who, in the end, says his former accountant paid him $100,000 for the business he poached—and now even refers some clients to Jones.

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